Summary of Part I

It's a paradox: none of the most successful

economies of the world are market economies
anymore. Learn how China, Norway and
Switzerland do better by altruism and social
welfare.

What is Economy?
- launching a new debate on the basics
>> by Alexander Dill

Part I: Market Economy and the Paradox of China

Part II: World Economy and the Paradox of Global Goods
Part III: Political Economy and the Paradox of Public Choice
Part IV: Gift Economy and the Paradox of Freeware

1
>> Part I: Market Economy and the Paradox of China

When the Soviet Union went belly up in 1985, it looked like the Endsieg of
capitalism, the triumph of the western schools and their prophets Popper,
Keynes and Friedman, had arrived once and for all.
In 1990, the former socialist states finished entering what is still called the
market economy. The paradox: the only country that didn't—preferring to
keep on running a centralised communist system—is well on its way to
becoming the number one economy in the world today: the People’s
Republic of China.
Not only economists are hard pressed to accept this fact. If communism
and a market economy are not mutually exclusive, but actually harmonise
with each other ideally, then nearly one hundred years of anti-communist
paranoia would seem to be blowing in the wind.
The think tanks—or rather bunkers—in Boston, Washington, Chicago and
New York are witnessing the demise of their corporate identity: the
championing of free markets over protectionism and communism.
This year's Davos meeting motto, The Shifting Power Equation, has been
widely interpreted as heralding the rise of new powers. Russia and India,
far from embracing a market economy, made a big splash on the scene.
Faithless neocons and evangelists of deregulation alike recognise that the
most successful economies—according to the World Economic Forum’s
World Index of Competitiveness and the UN—are Switzerland and Norway.

2
A closer look reveals that neither nation embodies the classical definition
of a market economy. Not only is Norway ruled by a left-leaning socialist
(who also happens to be a woman), but it sports extremely high taxes,
astronomical labour costs and a policy of strict protectionism. Like
Switzerland, Norway is governed by politicians who are not corrupt and
who take pains to avoid everything that might be called political. The
ideological wars waged between Republicans and Democrats, Labourites
and Conservatives or Social Democrats and Christian Democrats have no
place in the brave new world of common sense.
It seems that the miraculous economic success of these world benchmark
leaders is much more easily explained by the rules of socialist manifestos
than the Ten Commandments of market economies. Everything seems to
going wrong in Switzerland and Norway:
- Their own currencies obstruct foreign investment
and trade
- High income levels impede full employment and
competitive production
- Strong governmental regulations suffocate
entrepreneurship
- The social security systems in these countries discourage personal
risk and work like a second income tax
- Daunting customs and taxes corrode private wealth
and inhibit private consumption

For starters, you can't simply settle down in these countries and start a
business. They decide whom they need.

3
If Norway, Switzerland and China were used as case studies at Harvard
Business School, business administration would become what economics
by definition still is: a social science.
The discovery of social and human capital as the inexhaustible source of
economic growth came relatively late to mainstream economics. It took
six years for the World Bank to finish its Report on the Wealth of Nations.

For the first time, the report estimates social and natural capital. Francois
Bourguignon, Chief Economist of the World Bank, nevertheless still ends
with the eternal mantra of the market economy: "Growth is essential if
developing countries are to meet the Millennium Development Goals by
2015."
Sorry, but how can an economy based on markets, supply and demand
meet Millennium Development Goals ten years from now? Wasn't this idea
the colossal blunder of all planning economies?
Was economic growth in China, where the word economy has only existed
for about twenty years, the result of a millennium goal provided by Deng
Xiaoping, the great reformer from Shenzhen?
If you visit Shenzhen today, you will be amazed at the number of BMW 7s
and Mercedes S-Classes you see. Although few people own cars, the
percentage of luxury cars is striking. Secondly, you will be surprised to
find public servants every 200 meters. They take care of neatness, dig up
the flowers at the roadsides or simply wait for your smile. The Governor's
Palace of Shenzhen has the dimensions of the Great Pyramid of Giza and
is, of course, called the People's Palace. When I visited the Governor of
Shenzhen for the second time, my name was correctly written on my
place card in his private restaurant, where I was served Coquilles St.
Jacques. China is, after all, proud of its common affluence. It gives you
the impression that the whole capitalistic effort was undertaken as a proof
that the collective has more to offer than the individual.
Even rich Chinese dislike private invitations. Wealth is a completely public
matter. If the hypothesis of self interest can be said to be the philosophical

4
base of a market economy, you would have to add in China: It's in my
own self interest that our country be as rich as possible. We would call this
the spirit of altruism. Ernst Fehr from Zurich and Klaus Schmidt from
Munich, economists researching altruism, challenge the dogma that self
interest is the sole motivation for all people participating in an economy,
noting that "This practice contrasts with a large body of evidence gathered
by experimental economists and psychologists during the last two
decades".
If we look for common benchmarks among economies as disparate as
China, Norway and Switzerland, strong altruism will be one.
Economic success is seen as a collective result in these nations. That
perspective corresponds with studies in entrepreneurship—like those by
Sophie Boutillier—that identify the entrepreneur as a mediator of social
capital rather than a single creator or conquistador.
What about pricing in such economies? A market economy has always
meant following the rules of supply and demand. From Adam Smith on,
the so-called natural price seemed to be the logical result of negotiations
that considered factors like labour, technology and capital. A market
economy represented a balance among different needs. “Market economy”
therefore became synonymous with justice: if pricing is the result of fair
negotiations, there should be no disadvantage for the individual—and
therefore nothing preventing anyone from entering the market.
In China, Norway and Switzerland, you will find the opposite scenario. Few
economies build up stronger obstacles to joining their markets. Few
countries have more tricks up their sleeves for thwarting start-ups from
the outside. In Switzerland, you have to hire a local administration board.
In China, the only way to settle down is via a joint venture. In Norway,
you have to learn Norwegian to obtain a work permit.

Naturally, each of these three countries boasts a different USP:

Switzerland is the benchmark leader in financial services, China looms

5
large in industrial production and Norway is at the helm of sustainable oil
sales. But the fact remains that the fiscal and institutional conditions are
set up by a strong governmental authority in each case. This authority is
legitimated by pluralist democracies in Norway and Switzerland, and by a
one-party democracy in China.

But in all three countries the government is backed by a strong majority of

citizens who uphold its conditions. The results are very low criminality,
abundant opportunities for higher education, extreme legality and
enduring internal stability.
Are they market economies in the classical sense? If today the benchmark
is competitiveness, they are. And the economies of Brazil, Russia, Saudi
Arabia and India, with their enormous iniquities, will remain forever
unstable unless they start to cultivate fairness, reciprocity and altruism.
Market economists underestimate the long-term potential of social and
human capital because you can't measure it in GDP per capita. The
econometric approach yields a false forecast for developing countries: Not
all leading economies are market economies and singular elements of
market economies cannot be transferred to societies whose civil life is not
based on the rational balance of individual self-interest. The far religions,
traditions and other collective identity rules ensure social equality , while
mantras like profit, effectiveness and growth risk failure. The post-Soviet
states and most of the emerging states are given a paradoxical message:
They should cut off their public sector and open their markets, but the
benchmark leaders are quite successful with the opposite approach. We
may call this a double-bind situation.

6
How close is China to the US economy? Closer than we estimate.
Recognising that 48% of the GNP in the US is generated by one sole
customer—the state of America—including the $470 bn spent on the
military and war, and keeping in mind that the US has total debts of about
$8 tn while China boasts savings of a minimum of $1tn, even a
revaluation of the Chinese RMB wouldn't change that much. Most Chinese
exports are impervious to currency risks, because they supply an
international demand. No other country, including India, could fill these
orders. A decline in world trade would weaken not only China, but Europe
and the Arab World as well. Communist China’s distinction of holding the
most social and human capital in the world is reflected by the number of
patents it holds: In 2006 China registered more patents than any other
country.
The market economy experienced its heyday during the twin eras of
Reagonomics and Thatcherism. New Zealand in particular surfaced as one
of the rare species of national economies to have been successfully
influenced by the economic policies of these schools in the so called
Rogerism. Today New Zealand has a Current Account Deficit (CAD) of 9%
of its GDP and Aaron Drew from the Reserve Bank of New Zealand speaks
of macroeconomic imbalances.
Today, macroeconomic issues have become a part of engineering; as
Gregor Mankiv from Harvard says: "Having recently spent two years in
Washington as an economic advisor at the time when the U.S. economy
was struggling to pull out of a recession, I am reminded that the subfield
of macroeconomics was born not as a science but as a type of
engineering. God put macroeconomics on earth not to propose and test
elegant theories but to solve practical problems."
So was the whole debate on market economies and Keynesian theory little
more than Quixotic tilting at windmills?

7
When it comes to macroeconomic engineering, the Chinese, Swiss and
Norwegians don't listen to Harvard or Oxford economists. Do they create
multiple hybrid solutions in their economies without having an overview of
the big picture?
Does practical engineering in national economies work better the less an
economy is regarded as a homogenous system? That would explain why
China ignored ecological issues for such a long time, only to discover them
at the very moment they found a practical way to solve them.
Successful states feel free to emphasise the private and governmental
sectors of their economies as they see fit. One day entrepreneurship is
promoted, the next day the state overtakes key economies. When Norway
became aware of its surplus tax revenues, it devised a unique fund: More
than €100 bn was invested in foreign markets and equity to keep oil
profits coming in for decades to come. Alaska, the only state in the world
offering a guaranteed basic income to its citizens, accomplishes this with a
national fund fed by the revenues from the taxation of the exploration of
its natural commons.
A Lexus hybrid vehicle doesn't make a fundamental decision between
running on fuel or battery. Both sources are used in the most effective
way. The communist-market economies are hybrid and unencumbered by
ideological taboos. They may employ double the number of people in the
public sector than they really need, but they won't give a dime to a
company that goes under and puts thousands out of work. In Switzerland
and Norway, rich people have to contribute to the social security system.
An investigation of China’s new millionaires showed that 80% of them
were the children of high-ranking functionaries in the communist party. In
a brand new Airbus 320 flying between Beijing and Shenzhen, I once sat
next to an old woman. I learned that she paid $10 for that flight—round-
trip. This fare was not due to a last-minute bargain—the elderly obtain
cheap tickets from the state to visit their families. And China has 200
million senior citizens!

8
In the Emirates, the same hybrid drive is at work in privately-owned
states: Dubai, Kuwait, Abu Dhabi and Bahrain are planned economies in
every sense of the word and provide very communist services to their
own people, such as free medical care, free housing and free education.
So do tax havens like Liechtenstein, Monaco and Luxemburg and
prosperous merchant cities like Vienna, Zurich and Hamburg.
That doesn't mean that the market economy has run out of steam; it has
never been put into practice in its pure form. At the same time, the hybrid
models discussed above cause us to question the essentials of neoliberal
thinking:
- If altruism is so prevalent in strong economies, why do we still
promote egoism and self-interest in our societies as essential for
economic competitiveness?
- If strong governments prevent their citizens from becoming victims
of macroeconomic imbalances, how can we continue to call for less
state and more privatisation of public goods and commons?
- If hybrid economies are able to integrate several contradistinctive
rules and principles, why do we insist upon theoretical and political
coherence?
Our market economies will have to face these questions if they want to
learn why they are descending in the rankings of enduring
competitiveness.